The Income Tax Act[1] includes specific provisions for “special trusts”. These trusts are taxed on the same sliding scale applicable to natural persons, which could be lower than the current 45% flat rate applicable to conventional trusts. Capital gains tax (“CGT”) is also lower within a special trust, at a maximum rate of 18% compared to 36% for ordinary trusts.

These trusts fall into two categories. The first is, trusts created solely for the benefit of one or more persons with a “disability”[2], where such a disability incapacitates such a person or persons from earning sufficient income for their maintenance or from managing their own financial affairs (type-A special trust). When the trust is created for the benefit of more than one person, all persons for whose benefit the trust is created, must be relatives of each other.

The special trust must not provide for the possibility of any beneficiary who does not have a disability for as long as the person(s) with the disability is alive. The trust will be taxed as a normal trust from the commencement of the year of assessment in which the last living beneficiary with a disability dies.

The second is a testamentary trust created solely for the benefit of relatives of the deceased person (type-B special trust). These relatives should be alive on the date of death of the deceased person and the youngest of the relatives should be under the age of 18 years.

Apart from not being taxed at a different rate, special trusts are subject to all other provisions of the Income Tax Act applicable to ordinary trusts for income tax and CGT purposes. The only difference is that special trusts do not qualify for the tax rebates, medical tax credits or the interest exemption applicable to natural persons.[3] Also, type-A trusts[4] are entitled to certain CGT exclusions applicable to natural persons. These include the annual CGT exclusion (R40,000), the primary residence exclusion, the personal-use asset exclusion and the rules relating to compensation for personal injury, illness and defamation.[5]  Furthermore, the type-A trust will continue to be treated as a special trust for CGT purposes, until the disposal of all the assets held by the trust or two years after the date of death of the last living beneficiary of the trust with a disability.[6]

[1] No 58 of 1962

[2] As defined in section 6B(1) of the Income Tax Act.

[3] See sections 6, 6A and 6B and 10(1)(i) of the Income Tax Act

[4] Additional definition in paragraph 1 of the Eighth Schedule to the Income Tax Act

[5] Paragraphs 5, 44 to 50, 53, 59 of the Eighth Schedule to the Income Tax Act

[6] Paragraph 82 of the Eighth Schedule to the Income Tax Act

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Special trusts
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